1976 (12) TMI 39 - HC - Income Tax

Attributable To, Business Expenditure, Business Income, Foreign Company, Income From Other Sources, Indian Company

Summary

Issues Involved:
1. Whether the Tribunal was justified in allowing the assessee to raise a new contention that its income was assessable under the head "business" for the first time.
2. Whether the fees earned by the assessee under the agreement dated November 27, 1958, are assessable as business income under section 28 or as income from other sources under section 57.

Detailed Analysis:

Issue 1: Justification of Tribunal Permitting New Contention
The Tribunal allowed the assessee to raise a new contention that its income should be assessed under the head "business" rather than "other sources" for the first time during the appeal. The Tribunal's discretion under Rule 11 of the Appellate Tribunal Rules, 1963, allows for new grounds to be raised if no new facts are required and the other party is given an opportunity to respond. The Tribunal found that all necessary facts were already on record and no additional investigation was needed. Moreover, the department was given a full opportunity to contest this new contention. Consequently, the Tribunal's decision did not place the appellant in a worse position and was justified in permitting the new contention. The court answered this question in the affirmative.

Issue 2: Assessment of Fees as Business Income or Income from Other Sources
The second issue concerned whether the fees earned by the assessee under the agreement dated November 27, 1958, should be assessed as business income under section 28 or as income from other sources under section 57. The Tribunal and the court examined the nature of the agreement between Gilbarco and Larsen, which involved granting a license to use technical know-how, patents, and trademarks for manufacturing pumps in India. The court referred to the principles established in Jeffrey v. Rolls Royce Ltd. and Commissioner of Income-tax v. Cilag Ltd., which distinguish between parting with a capital asset and employing it in trade.

The court concluded that the agreement did not involve the outright sale or parting with the capital asset but rather the licensing of technical know-how and trademarks for use in business. Therefore, the income derived from this agreement was considered business income under section 28. Consequently, the expenses related to research and development were allowable as deductions. The court answered the second question by affirming that the fees earned by the assessee were liable to be assessed as business income under section 28.

Conclusion:
The court ruled that the Tribunal was justified in allowing the new contention regarding the assessment of income under the head "business." Additionally, the fees earned by the assessee under the agreement were to be assessed as business income under section 28, allowing for the deduction of research and development expenses. The department was ordered to pay the costs of the reference to the assessee.